A pivotal court decision could be come soon as to whether a major cryptocurrency is a security, following years of back and forth between the Securities and Exchange Commission and Ripple Labs.
Ripple and the SEC asked for a ruling from a judge in September and a decision is expected during the first part of this year. At the heart of it is a dispute over whether the company's sale of its XRP token is an unregistered security, as the SEC claims. The SEC has accused Ripple of raising $1.3 billion in 2020 through the sale of XRP and has also sued CEO Brad Garlinghouse and co-founder Christian Larsen.
What kind of precedent the decision could set for the broader digital asset industry will be up to the judge, though either way it figures to influence the value of XRP, the sixth-largest cryptocurrency by market capitalization, with a total market value of over $28 billion as of Wednesday afternoon.
“The general impact could be highly specific to the facts of SEC v. Ripple, limiting any broader impact,” said Ashley Ebersole, general counsel at 0x Labs and a former SEC lawyer. “Or the court could release an opinion that reaches more legal issues and has a more dramatic effect.”
Others say the case has been overhyped and really won’t have a major legal impact.
“Regardless of who wins, the actual impact on regulation is near zero other than the fate of Ripple itself and its counsel and executives,” said Ty Gellasch, a one-time counsel to former SEC Commissioner Kara Stein, now president and CEO of the Healthy Markets Association. “If Ripple wins, it will be a pretty significant public relations win even if it’s not an important legal one for the industry. “
If the SEC wins, Gellasch said he expects a day of “chest pumping” and for the SEC and the industry to then move on quickly.
If the SEC wins
If the court decides that XRP is a security that would make the sale of XRP an unregistered securities offering in violation of the law.
The court could also address secondary market transactions, because XRP was issued on exchanges, said Gary DeWaal, senior counsel at law firm Katten. XRP was distributed on crypto trading platforms and because of that, the court could come up “with a more expansive decision,” DeWaal said, though past initial coin offering cases have not also seen repercussions for secondary market sales DeWaal said.
An initial coin offering case made late last year could serve as a guidepost as to what might happen with Ripple. A New Hampshire district court ruled against decentralized publishing platform LBRY, which argued that the SEC did not provide enough warning that the platform's LBC token was an investment contract. The court ruled in the SEC's favor.
If the decision is just limited to whether XRP is an investment contract in connection with the initial offering, that "will be a very specific facts and circumstances decision," DeWaal said. “My guess is that it will be a victory of public opinion for the SEC but it will probably not move the bar tremendously from where it is today," with regards to U.S. law around digital assets.
Other sources said the SEC has a strong argument in finding that XRP is an investment contract. “One could say that the SEC is undefeated when it comes to digital assets and what they think are securities,” said Aaron Kaplan, co-CEO and co-founder of Prometheum, a digital asset infrastructure firm.
If a judge does decide that XRP is a security, the scope could go beyond XRP to other cryptocurrencies, Kaplan argued, as it would further establish precedent for future rulings over other tokens.
“I think that there could be some sort of effect where virtual currency exchanges are much more concerned and aware of the potential regulatory implications of certain assets they’re trading,” Kaplan said. “But the larger intellectual paradigm shift is occurring already.”
If Ripple wins
Ripple has made a fair notice argument in court, saying that the SEC did not give enough advance warning that selling XRP was not allowed, essentially echoing broader criticism from the industry over lack of specific digital asset guidance from the agency.
A recent Supreme Court decision in a banking-related case, Bittner v. United States, supported that fair notice argument.
“Without fair notice of what activity is prohibited by the statutory language, Ripple can claim [its] right of due process has been violated, which provides a defense that will negate liability,” said Agnes Gambill West, a visiting senior research fellow at the Mercatus Center.
If Ripple wins, especially on its arguments of whether it was given fair notice that the agency considered XRP to be a security, that could lead to a “powerful defense,” she said. Other crypto companies then could use that against future SEC litigation, she added. “Such a ruling would be a big win for the industry.”
A Ripple win could mean a win for “political press relations,” of the crypto industry and its allies, said Better Markets’ Gellasch. "If Ripple were to win, I would expect some policy, some lawmakers, maybe even some existing regulators, certainly crypto industry titans to say — see we told you all along that this stuff can’t be securities,” Gellasch said.
A Ripple win for the industry won’t be vast and won’t hamstring the SEC, he said. But it would give industry advocates a “talking point,” for legislative initiatives, he added.
Either side could appeal the court's decision too, further prolonging the fight. The court may also choose not issue a full summary judgement either.
“There are three options here — one side wins, other side wins, nobody wins and the fight goes on,” Gellasch said.
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